Chronicle Journal: Finance

A Chinese E-Commerce Stock Challenging Alibaba's Dominance

While Alibaba (BABA) continues to be a dominant e-commerce giant in China, growing regulatory measures by the Chinese government and the suspension of the Ant Group IPO has led to a drop in its share price. Meanwhile, its rival Pinduoduo (PDD) has quickly risen to become the third largest platform in the Chinese e-commerce market. Is it a Buy? Let’s find out.

Based in the People’s Republic of China, Pinduoduo Inc. (PDD) is an e-commerce mobile platform that provides a range of products like shoes, bags, apparel, food and beverage, fresh produce, electronic appliances, household goods, personal care items, fitness items, and auto accessories. While the Chinese online shopping market is dominated by Alibaba (BABA), lesser-known PDD is growing faster than its rival and gaining market share quickly.

With BABA’s stock dipping owing to the actions of Chinese government’s antitrust watchdog that aims to root out monopolistic practices, its regulatory controls, and the temporary suspension of the IPO of Ant Group in which the company has a 33% stake, PDD is in a favorable position as its robust revenue growth and lower marketing expenses can offer sustainable long-term gains.

PDD has registered impressive growth this year, with active buyers increasing 36% in the twelve-month period that ended September 2020 to 731.3 million. PDD saw dazzling revenue growth over the past two years due to a substantial increase in its user base, surpassing JD.com (JD), and reaching close to BABA.

PDD currently ranks third in China's e-commerce space, behind BABA and JD. The pandemic has helped the stock gain 275.5% year-to-date. This impressive performance and potential upside based on several other factors have helped PDD earn a “Buy” rating in our proprietary ratings system.

Here’s how our proprietary POWR Ratings system evaluates PDD:

Trade Grade: A

PDD is currently trading above its 50-day and 200-day moving averages of $88.02 and $68.44, respectively, indicating that the stock is in an uptrend. The stock gained 70.3%, over the past three months, reflecting solid short-term bullishness.

PDD’s revenue increased 89% year-over-year to $2.09 billion in the third quarter that ended September 2020. This impressive growth is primarily attributable to an increase in revenues from online marketing services. Gross profit rose 92.8% from the year-ago value to $1.61 billion, while net cash from operating activities increased 217.8% year-over-year to $1.22 billion.

PDD recently announced that it is raising funds through an issue of shares and convertible notes to undertake investment in agricultural logistics infrastructure and responsive manufacturing. The company expects to use the proceeds to strengthen its balance sheet and expand business operations.

Buy & Hold Grade: B

In terms of proximity to 52-week high, which is a key factor that our Buy & Hold Grade takes into account, PDD is well positioned. The stock is currently trading just 8.7% below its 52-week high of $155.61, which it hit on November 13th.

The company’s net revenue grew 74.9% year-over-year, while EBITDA increased 240.8%. Its average monthly active users increased 50% from the year-ago value to 643.40 million in the third quarter that ended September 2020. This can be attributed to strong user engagement, continued advancement in market position, and steady growth in consumer base.

Peer Grade: A

PDD is currently ranked #1 out of 115 stocks in the China group. Other popular stocks in the China group are Alibaba Group Holding Ltd. (BABA), JD.com, Inc. (JD) and Baidu, Inc. (BIDU).

BABA, JD, and BIDU have gained 21.8%, 142%, and 17% respectively, year-to-date. This compares to PDD’s 275.5% return over this period.

Industry Rank: B

The China group is ranked #23 out of 123 StockNews.com industries. China has demonstrated impressive performance in terms of GDP at a time when most economies are in recession. The Chinese economy has bounced back from the virus slump, resuming industrial operations after successfully flattening the curve. Hence, stocks in this group present a huge opportunity for investors across the globe, as it allows them to profit off growth in the second largest economy in the world.

Overall POWR Rating: B (Buy)

PDD is rated “Buy” due to its short-and-long-term bullishness, solid price momentum, and underlying industry strength, as determined by the four components of our POWR Ratings system. 

Bottom Line

PDD is well positioned to soar in upcoming months despite gaining 275.5% so far this year. While BABA is the largest Chinese e-commerce company, PDD is growing its sales at a much faster pace compared to BABA. The company has the potential to grow even further based on its continued business growth, favorable earnings and revenue outlook, and strong financials.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is pretty impressive for PDD. It has an average broker rating of 1.51, indicating favorable analyst sentiment. Out of 35 Wall Street analysts that cover the stock, 21 rate it a “Strong Buy”.

The consensus EPS estimate of $0.47 indicates a 188.7% improvement year-over-year for the next year. Moreover, PDD has an impressive earnings surprise history, with the company beating consensus EPS estimates in three out of trailing four quarters. The consensus revenue estimate of $11.67 billion for the next year indicates 53.5% growth from the same period last year.

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PDD shares were trading at $135.88 per share on Tuesday morning, down $6.15 (-4.33%). Year-to-date, PDD has gained 259.28%, versus a 13.72% rise in the benchmark S&P 500 index during the same period.



About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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